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Time-bar clause in construction contract defeated by estoppel

Estoppel and waiver are common arguments used to rebut the enforcement of time bar and notice provisions in construction contracts. However, these arguments have often seen limited success. Nevertheless, estoppel was successfully argued in a recent Australian case in the New South Wales Court of Appeal.

 

Introduction

In brief summary, estoppel arises where party A leads party B to assume (through its words or actions) that a particular state of affairs exists between them or will exist, and in reliance on that assumption party B acts or refrains from acting. Party A may then be prevented from going back on its words or conduct that led party B to act on that basis. Waiver, a separate but related doctrine, refers to an act by one of the parties, having knowledge of the relevant facts, whereby that party abandons its legal right (such as a contractual right) by acting in a manner that is inconsistent with that right.

In the context of construction contracts and time bars, the issues of estoppel and waiver commonly arise when a contractor carries out variation works on an assumption prompted by the employer that the employer will pay the contractor for the varied work, irrespective of any notification or time bar provision in the contract. This was the situation in Valmont v Armani.

 

Valmont v Armani

In Valmont Interiors Pty Ltd ("Valmont") v Giorgio Armani Australia Pty Ltd ("Armani") (No 2) [2021] NSWCA 93, Valmont argued successfully that Armani was estopped from enforcing the notification and time bar provisions under the contract.

  • Valmont was engaged by Armani to provide construction and fit-out works for a new Emporio Armani store at Sydney Airport.
  • Under the contract between the parties, it was envisaged that a third party would supply certain joinery works. However, once the third party informed Armani that it would be unable to supply the joinery works, Armani instructed Valmont to supply these items instead (although without giving a formal variation instruction).
  • Once Valmont had supplied the joinery items, Armani refused to pay Valmont for the additional works, arguing that Valmont had failed to provide a notice of variation as required by clause 15.2 of the contract and that Valmont had thereby waived any entitlement to claim additional money from Armani. Clause 15.2 of the contract stated:

"If [Valmont] considers that a Direction of [Armani] is a Variation but [Armani] has not issued a Variation Direction, [Valmont] must give notice of the purported Variation to [Armani] within 5 Business Days after the Direction by [Armani] that constitutes the purported Variation and clause 15.1 will apply to the purported Variation. If notice is not provided by [Valmont] in accordance with this clause 15.2, [Valmont] releases and waives any entitlement it may have to a Claim against [Armani] in connection with, or arising from, the purported Variation."

  • Valmont argued that Armani was estopped from relying on clause 15.2 because Armani itself had not followed the procedure set out under clause 15 of the contract (i.e. it had not formally instructed a Variation where it should have done so). Valmont argued that it had been led to assume by Armani that Armani's formal approval to proceed with the works as a Variation was not required under the contract.
  • In its defence, Armani argued that certain emails it had sent to Valmont displaced any assumption that Valmont would be paid for the joinery works without following the procedure under clause 15 of the contract. Written approval was required for variation works pursuant to clause 15 of the contract. The emails contained exchanges between Armani and Valmont relating to express written approvals for façade works, which were variations to the contract. Armani argued that these emails demonstrated there was no estoppel.

 

The Court's Ruling

The court rejected Armani's arguments and held that the emails relied upon by Armani were not sufficiently clear to have displaced the assumption induced by Armani that Valmont would be compensated for supplying the joinery works. This was primarily because the emails that Armani sought to rely upon related to façade works and not the joinery works.

The fact that Valmont had sought written approval to proceed with the façade works (pursuant to clause 15) but not the joinery works was consistent with Valmont proceeding on the assumption that Armani's formal approval was not required because that approval was implicit in its original instruction to Valmont to procure the joinery. The estoppel thus created by Armani's conduct prevented Armani from relying upon the contractual waiver in clause 15.2.

 

Commercial Implications

Both contractors and employers need to be aware of the risk of acting inconsistently in relation to their rights and obligations under the contract, which could later lead to them losing the ability to rely on those rights or enforce those obligations. In practice, parties do not always comply with notice requirements strictly, especially on large, complex construction projects where variations to works can be a common occurrence. The best preventative measure is for contracting parties to establish rigorous contract management systems at the outset of a project, and then adhere to them. Informality usually gives rise to uncertainty.

To address the risk of informality in contract administration, contracts may include anti-waiver / anti-estoppel wording, to express the mutual intention that informal conduct will not have an effect on the parties' rights and obligations under the contract. Provisions of this nature have been upheld in England and Wales, although their effectiveness is questionable in other jurisdictions such as Singapore.

Finally, we note that the legal position may well be different where a construction contract is administered by a third party, such as an independent engineer or architect who, in that capacity, does not necessarily act as agent of the employer. A contract administrator will usually have no general unilateral power to waive the operation of those provisions of the contract, which are for the benefit of the employer. Those provisions will include notification and time bar provisions. Accordingly, the fact that the contract administrator has lapsed into informality does not necessarily bind the employer, unless the employer has approved of or acquiesced in the contract administrator's conduct.

 

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